Technology Editor

As the financial system in parts of the world crumbles, the decentralised digital currency Bitcoin has rocketed to a market capitalisation of almost $1.2 billion in what some believe is a sign the boom will soon turn to bust.

Bitcoin is an attempt to create a decentralised, crypto currency with no governments or central banks in control (see video). Transactions can be virtually anonymous, and the currency can be bought and sold at online exchanges.

One bitcoin is at the time of writing worth $A110 or $US115 - up from around $US50 in mid-March and below $US15 in January. There are almost 11 million bitcoins in circulation.

Patcht.com founders Simon and Rachel Rodwell.

There have been reports that Europeans have been ploughing money into bitcoins after losing faith in governments and financial institutions - highlighted by the recent banking crisis in Cyprus - and the unstable euro.

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HSBC chief economist Paul Bloxham likens it to the recent increase in the value of gold. “As people lose faith in paper money ... we see a shift towards other sorts of assets,” he said.

Wall Street analyst Nick Colas, of the ConvergEx Group, said in a research note that Bitcoin was having its “breakthrough moment” but The Economist sees signs of a bubble, arguing new users are buying bitcoins as an investment rather than a means of exchange.

A graph showing the value of bitcoin growth over time.

While it gained popularity as the default currency for underground drug marketplace Silk Road, legitimate web-based firms such as Reddit, WordPress, Expensify, Kim Dotcom's Mega and Australian online retailer Patcht have begun offering bitcoin as a payment option.

One start-up claiming to have created the first Bitcoin ATM says it has received orders for over 300 machines in 30 countries.

BusinessWeek wondered whether Bitcoin may be the world's last economic safe haven - a big call considering the currency's turbulent history, which has seen the value rise and then crash to less than $US2 after several bitcoin exchanges and digital wallets were breached by hackers in 2011.

Patcht.com founder Simon Rodwell, based in Sydney, said he made the decision to accept bitcoins after frustrations dealing with banks, payment gateways and credit card providers.

He admitted he was “taking a gamble” on the fluctuating price but said to reduce risk his prices in bitcoins were derived by taking the current AUD-BTC exchange rate from BCChanger.com and adding a 5 per cent margin. So far, given the soaring price, margins on his few bitcoin sales had been “particularly high”.

“People currently see them [bitcoins] more as a commodity rather than a currency but I believe that will change over the coming year,” said Rodwell.

Australian beef delivery company honestbeef says it has been accepting bitcoins since 2011.

Colas said: “If central banks and regulators actually ran their monetary policies to maintain public confidence in the value of their currency, bitcoin wouldn't have a chance.”

With bitcoins there is no need to trust intermediary institutions to maintain the value of the currency, facilitate trades or store deposits on people's behalf. Payments can be made direct via peer-to-peer.

Instead of being issued by banks, bitcoins are “mined” in batches using PC software by those with access to huge amounts of computing power. The computers churn through complex mathematical puzzles, the difficulty of which ensures that coins are issued at a steady rate. Regular laptops can churn through the calculations for years without earning one coin, so most users buy bitcoins from online exchanges.

The number of bitcoins in circulation has been preprogrammed to grow at a slow rate, with issuance ceasing altogether in 2140.

The largest bitcoin exchange is Tokyo-based Mt. Gox, which reportedly processes around $US6 million worth of bitcoin trades per day.

The first Bitcoin hedge fund, Exante, launched in Malta in March, while in the US the Silicon Valley Bank recently partnered with Mt. Gox and Coinlab, agreeing to hold bitcoin deposits for US customers.

Reuters last year reported it had seen documents showing workers at Morgan Stanley and Goldman Sachs in London and New York were visiting online Bitcoin exchanges as often as 30 times a day.

Regulators are starting to pay attention, with the US Treasury Financial Crimes Enforcement Network on March 18 declaring that some Bitcoin businesses must register with government and abide by regulations.

For instance bitcoin exchanges would have to comply with similar rules to a traditional foreign currency exchange, such as verifying the identity of those making an exchange.

Some believe regulations will add legitimacy to the digital currency but the Bitcoin Foundation believes the regulator is over-reaching, arguing new rules must go “through proper rulemaking proceedings and not by fiat”.

A report published in October last year by the European Central Bank found virtual currencies like bitcoins did not pose a risk to financial stability because they had only a limited connection with the real economy, but it warned of the potential for them to be used by criminals, fraudsters and money launderers.

The Reserve Bank of Australia has been approached for comment.

92 comments

How stupid, issued by the "Bank of Gullible" ? Buy gold or silver if you're that way inclined...

Commenter

If you can't kick it...

Location

Melbourne

Date and time

April 03, 2013, 10:26AM

If you don't understand what you're reading, don't comment on it.

Commenter

Harley

Location

Melbourne

Date and time

April 03, 2013, 11:19AM

Thats what i first thought but the creator has no role in the system and all coins need to be bought with real money. Remember money is an abstraction its just a piece of paper .. so it comes down in trust of the issuer and the crypto design of bit coin is solid... It does makes sense a fixed currency ( when it reaches the limit) with no government control or inteference..no devaluation based on inflation due to quantative easing is possible etc ...

Commenter

ben

Location

Shanghai

Date and time

April 03, 2013, 11:32AM

I saw the concept when they were $12 in january and thought it was a really good concept, I nearly bought some, then they went up to $20 and I thought it was a bubble. There is not enough places to trade them, the price is driven by specualtion. hopefully the publicity will prompt more retailers to accept them or developers to develop easy to use payment apps. then the value will rise ligitimatey. However I'm concerned about what the major economies will do if that occurs. "the European Central Bank found virtual currencies like bitcoins did not pose a risk to financial stability because they had only a limited connection with the real economy" If they decide it does poes a risk (because there is another currency that they can't control competing with teh currency they have their wealth stored up in and driving its value down) I'm concerned what they will do, make bit coins illegal? that would suck for anyone who buys bitcoins. I think for Bitcoin to reduce its political risk it should promote its self as a local trading scheme where people can trade goods easily. A large body of people using bitcoins instead of petty cash wold make it non threatening to large economies, but the widespread use would make it hard for governments to stamp out. unfortunatly Bitcoin is a bit clunky for this at the moment.

Commenter

Aaran

Location

Townsville

Date and time

April 03, 2013, 11:48AM

$115 australian for one bit coin. sure looks like a get rich quick scheme to me. Love when they drop and the "company" who provides them closes up shop and disappears (probably to Monaco or the caymans...)

Commenter

Trentley

Date and time

April 03, 2013, 11:59AM

Look in your wallet and your will see bits of plastic. You call them notes but an alien would call them bits of plastic and say you were mad for assigning a value to them.

Dollars notes, gold, silver, salt, tobacco, stones and shells have all been used as currency in the past. Using bit coins as currency is no more or less ridiculous than using those bits of plastic in your wallet. They key with currency is that the value exists in the collective minds of society, if we all believe it is worth something then it is, when we stop believing this it isn't.

The key with bit coin is that the algorithm is supposed to make it impossible for them to be counterfeited, if this turns out to be true then they may indeed be really worth a lot of money due to the comfort it will give those who use them.

Commenter

Darryl Melbourne

Date and time

April 03, 2013, 12:11PM

hmmmmm ... BitCoins ....... 1st of April ........ missed by two days!!!! Don't you hate that!

Commenter

Jack

Location

Yarraville

Date and time

April 03, 2013, 1:09PM

@Trently, they are $110 Australian. There is no one company that sells them, or one central governing authority, just an algarithm that controls how hard they are to generate - kind of like gold, the supply is limited by the difficulty to mine. That means a government can't just print more money to pay its bills resulting in inflation - the devaluing of everyone elses money. It doesn't have the physical limitations of paper money or the excessive fees and charges of paypal or mastercard. Consider what email did to the letter. Bitcoin could do the same to money.

Commenter

Aaran

Location

Townsville

Date and time

April 03, 2013, 1:38PM

Investors buy for a real long-term return on capital invested. Speculators buy hoping a future fool will pay more and they can sell out before the crash. The media are full of people whingeing that they speculated and lost - like in Cyprus banks and local ponzi scams. No sympathy for speculators, but governments ought to educate citizens to know the difference between investment and speculation. The finance industry will never tell them, because speculation by the innocent or by greedy fools is what buys the egregious, parasitical lifestyles of the finance industry insiders. There'll be one in your street.

Commenter

Cassandra

Date and time

April 03, 2013, 2:12PM

Gold is so overvalued. The difference though, is that it has the benefit of human historing-conditioning, with kings, pirates and dragons hoarding coverting it, and hoarding it - yet it does not make the shiny yellow metal somehow intrinsicly valuable. Sure it has some unique conductive and resistive properties, and is a trinket, but for a ridiculous $/kg value, actually seeing it as an 'investment' is ridiculous. It 'does' nothing, provides nothing and has no yield. Here's a hypothetical - what would happen if somebody or country managed to hoarde every peice of gold in the world? What would their 'net worth' be? Would it actually matter? Would anyone actually want to buy the gold from them? Could they still sell it for its current price? What would be the point? Gold is the biggest bubble of them all. All this time and effort to dig it up out of the ground, only to put it back in the ground, inside a vault.